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 Mon Jul 11, 2011
Index Member Comment: Stillwater pays stunning premium for Altar copper-gold project of Peregrine Metals
    Publisher: Kaiser Research Online
    Author: Copyright 2011 John A Kaiser

Peregrine Metals Ltd (PGM-T: $2.60)


Index Member Comment - July 11, 2011: Stillwater pays stunning premium for Altar copper-gold project of Peregrine Metals

Peregrine Metals Ltd jumped 221% to $2.60 on July 11, 2011 after announcing a plan of arrangement with Stillwater Mining Company whereby Stillwater will issue 0.08136 shares and pay US $1.35 cash for each share of Peregrine Metals. These terms represented a price of $3.16 based on Friday's Stillwater price of US $23.72, though at the end of Monday with Stillwater closing at US $18.46 (down $5.19) the offer was worth only US $2.85 or CAD $2.77 at a 0.973 exchange rate. Stillwater's sharp drop partly reflected the market's dismay over the premium Stillwater was willing to pay Eric Friedland's Peregrine Metals for a copper-gold project in Argentina still at the PEA stage, and partly the broad market sell-off in response to evidence that the Republican party would rather push the United States off a cliff than work out a compromise that lifts the debt ceiling and avoids a default. While the left likes to lambast the Tea Party as foot soldiers for the establishment, it is starting to dawn on the latter that the Tea Party is not as dumb as their insistence on no more taxes, not even for the rich, might seem. The vast majority of Tea Party members make less than $150,000 per year and are not so gullible as to believe that one day they too might collect huge salaries for stealing money from pensioners and taxpayers; what they are is loaded with resentment, and while it might seem they wish nothing but harm for their fellow citizens, what they do know is that as long as capitalism seeks out the lowest cost jurisdiction, which the United States is not yet, there is little hope for prosperity growth that lifts all boats. In turning minimal taxation of the elite into a sacred cow the Tea Party has in fact turned itself into a trojan horse that will cost the elite dearly when confidence in the viability of the American economy collapses, bringing down the value of the equities and bonds whose ownership is concentrated in the hands of a tiny minority Republican politicians have been tricked into defending against any tax increases. But in fact the Tea Party is setting up a really bad trade in the form of incremental tax savings for massive wealth destruction suffered mainly by those with significant net household worth. Some of the elite such as Warren Buffett have already figured out the nature of this sucide mission, but others such as the Koch brothers continue to bang a doomsday drum oblivious for whom it ultimately resounds.

The premium Stillwater is paying for Peregrine's Altar deposit reflects a rejection by Stillwater management of the embedded pessimism that sees only an economic downturn for the future. Today, after House leader John Boehner capitulated to the Tea Party demand that the American economy, and possibly the world economy, be brought to its knees, was not a good day to assert an optimistic outlook. However, if you believe that the establishment usually figures out where its best interests lie, and that August 2 is the deadline for doing so, Stillwater's timing does not matter. FOX News, the primary proganda conduit for Tea Party populism, has been crippled by the exposure of Rupert Murdoch as a shameless and manipulative cynic from whose heart the interests of average Americans are starting to look very remote. It will not take long before the establishment rises to put an end to the Washington gridlock, and soon the market will realize that the embedded pessimism that has depressed the valuations of resource juniors with ounces and pounds in the ground is dead wrong. The KRO Intermediate Copper Index above shows that the prices of copper juniors with more than 2 billion net copper pounds in the ground have tracked the uptick of copper prices during the past couple weeks. The alternative view is that companies such as Barrick and Stillwater that are buying copper assets are wrong and will regret their actions, just as turned out to be the case for those who bought out juniors in 2008 ahead of the meltdown which began at the start of summer.

As the table below indicates, the Altar deposit had a measured+indicated+inferred resource of 1,267,000,000 tonnes of 0.42% copper and 0.06 g/t gold representing 11.7 billion lbs of copper and 2.4 million ounces gold with a gross metal value $52.3 billion at spot copper and gold, of which the copper GMV is 93%. Based on 152,807,135 shares fully diluted and Friday's closing price of $0.81 Peregrine had a market cap of $124 million which is the implied value of the 100% owned Altar project. In terms of market capitalization per in situ pound of copper the valuation was $0.008 per lb using 117.8 million issued shares as the base. At the net equity value of the Stillwater plan based on Friday's Stillwater price, US $451.4 million (after subtracting $34.4 million for the exercise of warrants and options), the valuation jumps nearly 400% to $0.039 per lb. This pushes the valuation into the $0.03-$0.05/lb range at which a number of takeover bids involving both large and medium sized copper deposits have taken place since 2003. Our Dominant Copper Deposits ranked by $/lb Table compares market valuations among existing resource juniors with copper deposits and those taken over. (The figures are based on issued stock and copper lbs net to the company.) For other copper rankings or other metals we suggest KRO members visit our KRO Resource Estimate Index for which you can also find a link in the menu that drops down from the "research tools" tab at the top of each web page.

I looked at Peregrine Metals as a possible bottom-fish earlier this year, but because of the lowish copper grade and skepticism that the Chinese entities which had been snooping around would make a move during a year when the Chinese economy is retrenching I felt I had time. That a North American company such as Stillwater would come out of the woodwork with an aggressive offer has caught me by surprise. It is certainly annoying that the other Peregrine which is a Kaiser Core Pick for 2011 has languished this year, and dropped lower everytime I reminded Spec Value Hunters to own it. The Peregrine Metals plan of arrangement requires a special meeting, with a circular expected to be filed in August. The transaction will probably not close until September, by which time Peregrine Diamonds Ltd should be moving on news from the 2011 season. There is overlap in the shareholder bases of the two Peregrines, so we should start to see some migration of capital into the diamond junior as shareholders exit the copper junior. Of greater significance is that Eric Friedland has turned Peregrine Metals and its Altar copper project into a success without any help from his brother Robert in whose shadow the market perceives Eric to stand, so the Peregrine Metals plan of arrangement with Stillwater serves as a big empowerment event for Eric Friedland which will reap benefits for Peregrine Diamonds Ltd this fall when he is able to bestow his full attention on the basket in which he has the most eggs and which is focused on a sector in which his brother has had no measurable success.

Project Resource Estimate - Altar
Oct 4, 2010NI 43-101Ron Simpson, GeoSim ServicesCutoff: 0.3% Cu eq.
Resource CategoryTonnageTotal
Rock Value
MetalGradeRecoveryContained Metal% of GMV
Measured Resource491,000,000$42/tCopper0.430%100.0%4,654,541,446 lb93%
Gold0.06 g/t100.0%962,962 oz7%
Indicated Resources311,000,000$39/tCopper0.400%100.0%2,742,504,409 lb93%
Gold0.06 g/t100.0%569,945 oz7%
Inferred Mineral Resources465,000,000$41/tCopper0.420%100.0%4,305,555,556 lb93%
Gold0.06 g/t100.0%867,119 oz7%
All Categories Spot1,267,000,000$41/tCopper0.419%
11,702,601,411 lb93%
Gold0.06 g/t
2,400,026 oz7%
All Categories LTA1,267,000,000$30/tCopper0.419%
11,702,601,411 lb93%
Gold0.06 g/t
2,400,026 oz7%
Spot Gross Metal ValueMarket Cap as % of Net GMVSpot Prices Used
$52,253,435,3760.2%Copper $4.15/lb, Gold $1,536.50/oz
LTA Gross Metal ValueMarket Cap as % of Net GMVLTA Prices Used
$38,277,762,0050.3%3 Year Average: Copper $3.05/lb, Gold $1,077.00/oz

*JK owns shares of Peregrine Diamonds


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